High power prices to hit Indian utilities: Fitch

Fitch Ratings said in a report that significant increases in short-term power prices, especially those of peak load power, have started to affect the credit profiles of Indian power utilities. The distribution companies (DISCOMs), in deficit scenarios or otherwise, have sourced their peak demand power on the open market to achieve flexibility in power purchase operations.

Both the quantum and price of short-term power traded have exhibited a significant upward trend during the past two years. The spot price of short-term power contracts on India's two power exchanges has touched highs of Rs14 per kilowatt hour (Kwh) in recent months.

Fitch recognises that the upward trend in short-term power prices is a result of the increasing supply constraints prevailing in the power sector, as reflected in peak and base-load electricity shortages of 11.9% and 11.1%, respectively, during April 2008-March 2009.

"The reluctance of electricity regulators across different states to disallow higher expenditure on short-term power purchases has encouraged the utilities to bid aggressively for the purchases, driving rates even higher. Thus, the share of spot power cost in the total power purchase cost of power utilities is becoming disproportionate," says Salil Garg, Associate Director with Fitch's Energy & Utilities team.

Fitch notes that in the present policy scenario, where all power purchase costs are being considered as a legitimate pass-through in tariff fixation, the higher rates and quantum of power purchased from short-term sources outside the long-term PPA mechanisms directly increase the working capital requirements of these entities, which mean higher debt levels.

While the risk of the regulator disallowing the higher power purchase costs may be low, Fitch feels that the risk of a build-up of "regulatory assets" increases in the short-term when the regulator is reluctant to increase tariffs to match the increase in costs. With the expected build-up in regulatory assets, an increase in debt requirements of power distribution utilities may be inevitable, thus increasing the stress on their credit profile in the short-to-medium-term.

Fitch sees steep decline in GDPs of advanced economies

The world economy is entering a severe recession. Output is falling in the US, Japan, Germany, France and the UK, and this contraction in economic activity to intensify over the next 12 months. For the major advanced economies (MAEs, comprising the US, Eurozone, UK and Japan) in aggregate, Fitch Ratings is forecasting the steepest decline in GDP since the Second World War at -0.8%, in part reflecting the unusually synchronised downturn expected next year.

World GDP will grow by just 1% next year, the lowest rate since the early 1990s and compared to an average of 3.5% over the last five years. The combination of recession in developed economies, lower commodity prices and reduced international capital flows will result in a sharp slowdown in growth in emerging markets (EMs) though most will avoid outright recession.

The rapid intensification of the global credit crisis in the last two months and clearer evidence of household retrenchment, declining corporate investment intentions and falling world trade growth explain the sharp deterioration in the outlook since the summer. These factors far outweigh the benefits to income growth in the advanced economies from the decline in commodity prices.

Recession driven by a contraction in the supply of credit is uncharted territory for the world economy and there are few historical parallels on which to gauge its possible depth or length. However, the aggressive expansion of central bank liquidity provision since early September, in combination with major fiscal injections into the US and European banking systems, will head off the worst case scenario of widespread deflation.

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